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IMA: The myth of excessive fund charges

The fund management industry has been under attack recently over charges. There’s nothing wrong with that – as an industry we should be able to answer any accusations levelled against us. What is wrong, however, is the way in which the campaign against the industry has been built up around a series of myths that have been lapped up by the media.

The fund industry has the answers but the old adage rings true, never let truth get in the way of a good story.

I would like to take this opportunity to separate the facts from the myths:

1. Fund managers conceal the cost of trading.

No, they do not. Trading costs are published in a fund’s annual report and accounts by law. European regulators have carefully considered what should be disclosed as part of fund charges and they are very clear as to why trading costs have to be considered separately.

Whether this is enough or whether more could be done is another issue. The point is that they are not hidden.

2. Trading costs are too high and managers ’over-trade’ as a consequence.

The first point about this is that a fund manager trades in an attempt to increase the value of the investor’s portfolio. Second, the fund manager receives no financial benefit from trading. More important, any positive benefit from trading goes straight to the investor.

Successful trading improves investment return. For my management fee I expect the fund manager to trade each time he sees an opportunity.

3. Trading costs eat into investors’ returns.

No market can be accessed for free so trading costs will always be a reality. Recent IMA research proves that net performance shows the difference between the market return and the investor return is broadly the same as the total expense ratio.

It can be misleading to look at trading costs without understanding the difference they have made to the value of your investment. We will be publishing more on this shortly.

4. You are better off avoiding funds.

Not so. Fund investors benefit from pooling their money with each other so it works out a lot cheaper than DIY investing.

If you invested £10,000 directly in all the companies of the FTSE 100 it would cost you about £1,250 to buy the shares from a broker. Funds are likely to charge about £10 for the same trades and offer a much cheaper way of accessing those shares.

There have been a lot of big numbers bandied around, some of which have been calculated in a dubious manner, all of which are being used to paint the industry in a bad light.

As a leading IFA recently commented, the debate is focusing on the wrong thing. Surely, the number that matters to the individual investor is the net performance.

Mona Patel is head of communications at the Investment Management Association


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There are 10 comments at the moment, we would love to hear your opinion too.

  1. you are 'aving a laugh 12th March 2012 at 1:41 pm

    clearly nonsense as to take it to it’s extreme people can charge anything and it is okay . A more reasoned agrument would be better

  2. Agree entirely that trading costs are a red herring. The real issue is AMCs which are far to high in the retail market and compare poorly with the ultra competitive wholesale market (pension funds etc) even after the extra cost of much smaller client accounts is taken into account.

  3. In relation to point 4, won’t the fund levy an initial charge of about 5%, or approximatley £500? This is still less than the £1,250 quoted to invest as suggested, but should’t it be mentioned??

  4. “Surely, the number that matters to the individual investor is the net performance.”

    Should that read ‘nil performance”?

  5. Monkey with a Pin 12th March 2012 at 8:37 pm

    I would like to take this opportunity to separate the facts from the myths:

    1. Fund managers conceal the cost of trading.
    They look “hidden” to the average investor! Are they in the KIID? No, they in a place where your boss Richard Saunders admits that the average investor would never look i.e. the bowels of the annual report. Moreover they do not easily allow the investor to distinguish PTR as these costs are bundled in with those of purchasing new units and selling them.

    2. Trading costs are too high and managers ’over-trade’ as a consequence.
    The arguments given are also misleading. It points out that the positive benefits of trading go the investor but fails to point out that most fund managers attempts at trading are random in their successfulness (vs the market), so ignores the downside of trading to the investor for half the time when their trade is unsuccessful. This is what the whole debate is about. Excess trading = excess costs. It is not about the levels of the commissions on those trades.

    3. Trading costs eat into investors’ returns.
    By definition this has to be true. The only way it could not be would be to assume that the alpha level of an average fund manager is better than the market. However the average fund manager IS pretty much the market, so cannot be better than it statistically.

    4. You are better off avoiding funds.
    Funds indeed are probably better (i.e. cheaper) if you want to track an index. This is because of the number of shares needed to be bought to replicate it yourself and the very low TERs and PTRs of such funds.
    The same does not apply to any other fund, where the statement is pretty much always true.

    “the debate is focusing on the wrong thing. Surely, the number that matters to the individual investor is the net performance.”
    The fund industry does not publish this figure. Moreover the private investor cannot work it out as PTR is not being displayed anymore and where it is displayed still, it uses an incorrect definition that obscures the value.

  6. Surely fund managers worth their salt can now change their charging structure to one which rewards success and growth in the value of funds they manage, otherwise they don’t get paid for failure.

    A simple initial charge of say 0.5% for the costs of handling the funds and buying in for investors, then an annual management charge related to fund performance of 0.5% for example and no AMC if the funds do not perform in any one year. Another level of charge for successful growth over and above say a benchmark based on the sector average say of 0.5%, making a total potential maximum annual charge of 1.5% at best.


  7. It should be pointed out that fund providers are bound by what they can and can’t show. A firm couldn’t, for example, show charges including transaction costs in the KIID if they wanted to as this isn’t part of the detailed formula laid out for them to follow.

    They do show performance net of all ANNUAL fees and costs (assuming it is a dual priced fund of course). They show performance including the initial charge when using monetary values (something the powers that be hates with a passion)

    I don’t think these comments should be aimed at the fund managers – it needs to be said to the FSA and EU, they are the ones that set the requirements within which we all have to work, including the fund managers.

  8. Monkey with a Pin 13th March 2012 at 2:07 pm

    GXR – That is true the problem is partly with the regulators. However who advises and lobbys them? Yes, it’s the IMA!
    The problem is that the regulators have no input from private investors. Take the newly formed ESMA regulator which is responsible for KIID. They have a stakeholder group which according to their website is supposed to include private investors. How many are part of it? ZERO. Look at:

  9. My comment on the final sentence – True, but if the investor can get that same net performance via another route (ie. platform) for less in charges, they are likely to consider that a pretty important issue.

  10. My comment on the final sentence – True, but if the investor can get the same net peformance via another source (i.e. platform) because of a more favourable charging structure, they are going find that option an attractive one.

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